Pricing fuels rise in profit for Kraft

Foodmaker succeeds in passing along costs

July 29, 2008|By Mike Hughlett, TRIBUNE REPORTER

Food manufacturers' recipe for success these days is to pass down their own ingredient cost increases to retailers and ultimately consumers, and Kraft Foods Inc. succeeded in a big way during the second quarter.

Northfield-based Kraft on Monday beat Wall Street's expectations with its quarterly earnings and raised its own profit forecast for the rest of the year, which sent its stock up nearly 5 percent on a day the broader market sank.

Kraft, maker of products ranging from Oreos to Jello to Oscar Mayer meats, posted second-quarter earnings -- excluding special items -- of $879 million, or 58 cents a share, up 10 percent from last year's adjusted $802 million, or 50 cents a share.

Second-quarter results include a 6-cents-a-share benefit from "certain commodity hedging activities," the company noted. Still, even with that gain stripped out, Kraft topped the 50 cents-per-share profit estimate of analysts polled by Thomson Financial.

"This is one of the better quarters they've had in a while," said Greg Warren, a stock analyst at Morningstar Inc. Kraft's stock rose $1.45, to $30.83.

After enduring some pressure on profit margins, Kraft and many other food companies have been able to raise prices in the face of rising commodity costs in recent months. Much of Kraft's sales growth in the second quarter, in fact, came from price hikes, not increased volume.

Kraft also gave investors good news for the future, saying it expects its full-year earnings per share, excluding extraordinary items, to be at least $1.92, 2 cents higher than previously anticipated. Kraft said its organic sales -- excluding acquisitions and currency gains -- are expected to grow at least 6 percent, up from 5 percent.

"They are starting to hit the sweet spot in their turnaround," said Matt Arnold, a stock analyst at Edward Jones.

Irene Rosenfeld, Kraft's chief executive, is in the midst of a three-year effort aimed at improving the food giant's profitability and sales by boosting innovation and marketing.

That growth was driven by Kraft's ability to make price increases stick. Indeed, Kraft's 7 percent increase in organic revenue was solely driven by price increases; its sales by volume were down 1 percent during the quarter.

And Kraft's price hikes were "very broad-based," said David Palmer, a stock analyst at UBS.

Kraft expects its input costs to be $2 billion -- or 13 percent -- higher this year than in 2007. "Despite a very challenging economic situation, we can and will cover our input costs," Rosenfeld said in a Webcast with analysts.

Like all foodmakers, Kraft is facing steep cost run-ups in everything from cheese to wheat to soybean oil. But the company has a bigger challenge passing down those costs than some other food firms, Warren said.

That's because Kraft has a particularly broad product line, one also featuring commodity food items such as processed cheese. On the other hand, General Mills Inc. -- "the poster child for how to get pricing and maintain margins" -- has a more narrow, less commodity-oriented lineup, Warren said.

The inability to fully pass down cheese price hikes tripped up Kraft badly in the fourth quarter, pushing the company's profit margins down to levels not seen in years. But even cheese, while still facing significant challenges, saw profit improvements during the second quarter.

And compared with the same quarter last year, Kraft raised prices anywhere from 6 percent to 33 percent across 90 percent of its cheese portfolio.

Kraft's aggressive pricing action during the quarter led to a loss of market share in some categories, as it was out ahead of key competitors in implementing price hikes. The company also lost share because it backed away from promotions that threatened profits, analysts said.

Kraft's net income, skewed by a number of one-time items, rose from last year's second quarter by 4 percent, to $732 million, or 48 cents per share. Kraft's total sales, including currency translations and acquisitions, were up 21 percent, to $11.18 billion.